British Telecom is set to axe a further 5,000 jobs, unions claimed last night as the company announced better-than-expected first-quarter profits.

The Communication Workers' Union said the jobs would go from BT's network and systems operation division, which employs 40,000, and described the cutbacks as "totally unacceptable".

A BT spokesman confirmed that the issue of job losses had been raised at a meeting earlier this week but said he did not know where the figure of 5,000 had come from. BT added that it was disappointed the union had chosen to make public, matters that had been discussed in private.

News of the job losses came as BT reported profits of pounds 881m between April and June, a 1.4 per cent increase on last year. It also announced that a review into the business of its US partner, MCI, had become much more wide-ranging than previously thought. Executives again refused to say whether they had the power to renegotiate the planned $20bn (pounds 12bn) merger. But BT faced renewed criticism from analysts over the level of its profit with one analyst accusing the company of "a blatant fiddle", by temporarily slashing redundancy costs.

Sir Peter Bonfield, BT's chief executive, said the review would include all aspects of MCI's operations and of the merger terms themselves. BT launched the investigation a fortnight ago after MCI plunged the merger into jeopardy with a shock profits warning.

The US long-distance operator said losses this year from its drive into local phone markets would reach $800m, double the level previously forecast. Sir Peter and BT's finance director, Robert Brace, have recently returned from a fact-finding trip to MCI's Washington headquarters.

"The review is a wide review of the situation. The market place is changing rapidly.... We are looking at all aspects of the deal," said Sir Peter. Figures this week added to MCI's woes by showing a slowdown in growth from its main long-distance operation.

Sir Peter reiterated MCI's comments this week that the review would conclude in "weeks rather than months" and possibly by the end of August. BT's big shareholders have demanded information much sooner.

But he would not be drawn on whether the merger agreement allowed BT to renegotiate the terms, short of pulling out altogether. "This is a complex agreement interpreted by lawyers," Sir Peter added.

Last night there was growing speculation among analysts that the merger terms included a secret clause specifically banning renegotiation on the grounds of a deterioration in MCI's local business. In a separate briefing Sir Peter would only say some clauses of the agreement were "not public" and BT "has not publicised them".

Sir Peter also appeared to distance BT from MCI's bullish attack on the local market given by US executives this week. He said the "mutual review" would decide whether this strategy, which would raise investment substantially, was right. "Do they spend more, do they spend less?" said Sir Peter.

Responding to growing criticism from UK shareholders, Sir Peter admitted the events had dented the board's credibility. Asked whether British executives would be forced to resign, he continued: "I am employed at the pleasure of the board and nobody is denying me that pleasure. But I'm not a quitter."

BT also ruled out raising its pounds 2bn special dividend of 35p a share, due in September before the merger goes ahead, as a way of reducing the price for MCI. Investors in the US group will be paid partly in BT shares, but their price would drop after the dividend has been paid.